The chancellor seems to be tinkering constantly with the financial system, be it Autumn Statements or ad hoc announcements on providing mortgage guarantees, you’d be forgiven for thinking there’s nothing left to play around with.
But, you’d be wrong. George Osborne is expected to have a few more surprises up his sleeve when he gives his Budget to Parliament next Wednesday.
Here is a round-up of the 12 best predictions:
ISAs are big business in the UK, with 24 million – or nearly half – of the adult population holding one, due to their generous tax breaks. But as with any tax break, it lives in fear of a clamp down.
Accountants Baker Tilly predicted the chancellor could introduce a lifetime cap on ISA allowances, without forecasting what that cap could be. This is based on previous Treasury interest in a cap.
‘Officials from the Treasury discussed this with financial services executives prior to the 2013 Autumn Statement,’ said George Bull of Baker Tilly. ‘This met with some opposition but it is still possible… Large tax-free investments are vulnerable to the threat of taxation.’
An Isa cap would have to be set at a pretty high limit, as someone who has saved the maximum every year since inception would now hold around £130,000.
‘ISAs are a legitimate tax-favoured product used by millions of individual taxpayers,’ he said. ‘Many ordinary investors who have invested up to the existing annual limits could be affected by a cap which would effectively be retrospective.’
Income tax and the personal allowance
The coalition has said it wants to increase the allowance to £10,000 for the 2014/15 tax year. However, it is under pressure to increase it further, possibly to £10,500.
Tina Riches, national tax partner at Smith & Williamson, said tax giveaways were costly – a £100 increase in the personal allowance for 30 million working people would lose the Treasury £3 billion.
She noted that while there are calls to increase not only the personal allowance but also the 40% higher rate income tax threshold ‘in reality [the chancellor] has little scope to do either’.
Riches said ‘there are growing calls from Osborne's colleagues to support the increasingly squeezed middle’ by raising the 40% threshold from £41,865 as of April 2014 as ‘the threshold has been systematically reduced, especially in real terms, in recent years to compensate for the increase in personal allowance’.
Some 4.7 million people pay 40% tax on some of their income, up from just two million in 1994/95.
Hargreaves Lansdown predicted the 40% rate would be frozen to pay for a personal allowance rise, meaning five million people would be dragged into the 40% tax band.
National Insurance contributions
While the chancellor has recently backed a bill calling for national insurance (NI) and income tax to be merged into an all-encompassing ‘earnings tax’ there are no clues that this will happen this year.
Riches said she would like to see the NI contribution threshold brought into line with the personal allowance for income tax, which would prove the government is serious about lifting the poorest out of tax.
‘The chancellor talks about lifting the low paid out of taxation but he leaves them paying NI – a tax in almost everything but name,’ she said.
‘While the threshold for income tax will be £10,000 from 6 April 2014, employee NICs start at 12% on earnings above £7,956. So someone earing £10,000 a year is clearly not lifted out of tax as they pay £245 a year in NICs.’
She called for the NI threshold to be ‘nudged up ahead of inflation towards the income tax threshold’.
Capital gains tax
Capital gains tax (CGT) has been pretty much left alone over the past couple of years and while there are no big changes expected, Bull said there could be a freeze in the allowance, which is due to rise to £11,000 for 2014/15 from £10,900.
This does not seem unlikely as the allowance was frozen in 2012/13 at the previous year’s rate of £10,600.
Hargreaves Lansdown said CGT ‘encourages poor investor behaviour’ as it discourages initial investment, ‘provides a barrier to rational trading’ and ‘investors have to pay tax on their indexed gains’.
The group called for the reintroduction of indexing. Currently CGT is 18% for basic rate taxpayers and 28% for higher rate taxpayers but it wasn’t always like this. CGT used to be based on indexation which plotted the real rate of growth on assets and taxed on that basis, not on inflationary growth, meaning tax was paid on a smaller amount of profit.
Calls for reform to the ‘cliff-edge’ nature of stamp duty have been made for years, and as house prices have risen, these calls have grown louder.
Baker Tilly’s Bull predicted an uplift in the nil rate band threshold to £250,000, currently only properties under £125,000 do not attract the levy, while those priced £125,001 to £250,000 incur a tax of 1% of the purchase price.
‘Stamp duty [costs are] significant and often not considered by those buying at just above the threshold,’ he said. ‘The nil-rate band should, if changed to allow for price changes, be set at over £250,000.’
Bull added that the current stamp duty framework ‘distorts the market’ and called for a restructure, similar to that adopted in Scotland, that is tiered and more akin to income tax where a lower rate is paid up to a threshold and a higher rate paid on the remaining total.
Henry Knight, director of mortgage broker Springtide Capital, was even more optimistic and called for a stamp duty threshold increase for first-time buyers up to £600,000 – the maximum property purchase allowed under the government’s Help to Buy scheme.
‘While last years’ Funding for Lending and Help to Buy schemes went a long way to address the issue of helping struggling first-time buyers onto the property ladder, we still believe stamp duty is a significant obstacle to getting more homebuyers into their first home,’ he said.
Smith & Williamson’s Riches said the idea of an annual mansion tax on properties worth more than £2 million was ‘gathering steam’.
‘This would add much needed funds, although there is concern that a new tax on wealth, especially if it were introduced with little notice, would hit those with assets that have risen in value but who have low liquidity,’ she said.
She added that a wealth tax could be introduced via council tax reform. The current council tax bands have not been changed since they were introduced in 1993 and properties have grown significantly in value since them.
‘One possibility is therefore to amend those bands to provide a wider range of values at the top end,’ said Riches.
Sky-high house prices and rents coupled with home-owning households struggling to pay the bills means the idea of taking in a lodger is catching on.
Riches said an increase in the rent-a-room relief which exempts households from paying tax on up to £4,250 a year of rent from a lodger could be increased.
‘With four million people renting private property and the continued pressure on housing, an easy way to boost supply and to help those facing the ‘bedroom tax’ would be to increase the threshold for rent-a-room relief,’ she said.
‘Currently taxpayers are exempt from income tax on up to £4,250 a year gross receipts received from a lodger who is living in their only or main home. The figure has been unchanged since it was introduced in 1997 despite the huge increase in average rental charges since then.’
Help to Buy
The government’s Help to Buy scheme, which is offering equity loans and mortgage guarantees to first-time buyers, has been a huge success with thousands getting their foot on the ladder. The scheme is due to end in March 2016 but Knight hopes the chancellor will announce an extension to the mortgage loan (or Help to Buy 2) part of the scheme, but that it be scaled back in certain places.
‘We are hoping for a much more targeted approach to how the scheme is operated. In order to reduce the growing disparity between London and the rest of the country, we would like to see Help to Buy 2 operated according to the different requirements of individual postcodes. Some regions are more in need of a housing market boost than others.’
Single-tier state pension
More detail is expected to emerge on the plan to allow those already retired or retiring before 6 April 2016 to top up their national insurance ‘stamps’ in order to receive an increased state pension.
The government has said it will introduce a new class of NI; 3A that will be able to be bought from October 2015 to 6 April 2016, after which the new single-tier flat rate pension of £144 a week will be introduced.
‘For a limited period those over state pension age on 6 April 2016 with less than a full entitlement [to the state pension] will be able to buy extra pension of up to £25 per week,’ said Bull. ‘It will not be cheap – the value is to be actuarially fair, and will vary according to the age of the pensioners. The Treasury will set the price.’
Class 3A contributions could help those who have not worked due to periods of unemployment, or women who stayed at home to raise children, to increase their weekly state pension.
It is hoped the chancellor will use the Budget to set out the cost of purchasing extra years.
Small pension pots
Savers with small pension pots could be in for a windfall if the ‘trivial commutation’ rules are reformed. The rules allow a saver to take their pension as a tax-free lump sum if it is worth less than £2,000 or it their total pension pots added together are worth £18,000 or less.
Hargreaves Lansdown head of pension research Tom McPhail said the government could tweak the rules to allow pots worth more to be ‘commuted’ rather than forcing people to buy an annuity with the money.
He said a pension pot of £5,000 will buy an income of around £5 a week and a change in the rules could benefit 150,000 investors a year.
‘Reforming the small pots rule will help unlock improvements across the pension system,’ he said. ‘Small investors will get their money back; insurers will be able to sell better value annuities to large customers; it will help to minimise auto-enrolment opt outs and it’ll push cash into the economy.’
Savers have seen constant tinkering around the annual and lifetime allowances for pension contributions, which will decrease to £40,000 and £1.25 million respectively from April, that they are expected to be left alone.
McPhail said he wanted the government to begin increasing the lifetime allowance again after a series of cuts.
‘We would like to see a commitment to raise the lifetime allowance in future on an annual basis otherwise you might just as well tell the 30-somethings of today not to bother with pensions at all because they’ll be subject to 55% tax [the levy for saving more than the lifetime allowance] by the time they get to retirement,’ he said.
He said further erosion of the allowance, ‘even just by fiscal drag’ would eat into the ‘retirement aspirations’ of ordinary savers.
‘At today’s annuity rates, the lifetime allowance only allowed for an income of less than £45,000 a year; in 20 years’ time this could be just £25,000 a year,’ he said.
He added he would like to see an increase in the £3,600 pension contribution rate – which every person up to the age of 75 can invest into a pension each year and receive 20% tax relief on – to £5,000 as it has not been changed since it was introduced.
Tax-free pension cash
There are persistent rumours about a cut or cap on the amount of tax-free pension cash pensioners are allowed to take on retirement – currently 25% of the total pension fund.
However, the rumour mill seems to have died down this Budget and McPhail said he is not aware of any plans to cap as ‘any measure would be likely to only raise a modest sum of additional revenue and would probably further increase the complexity of the pension system.
He added that it could ‘alienate’ savers from contributing to a pension just as auto-enrolment ‘is trying to get off the ground’.